Tax Cut Fever
Are Republicans about to reenact their tax-reform triumph of 1986, their controversial “tax cuts for the rich” victories of the early 2000s, or their embarrassing faceplant from last month? Roughly speaking, those are the prospects that may await them as they turn their attention to taxes.
In 1986, Ronald Reagan and his allies in Congress implemented the last comprehensive overhaul of the tax code, which included rate reductions (most notably a drop in the top rate to 28 percent from an astounding 50 percent) but also numerous provisions to simplify the tax code, broaden the base, and eliminate tax shelters. A decade and a half later, George W. Bush & Co. settled for simple cuts that were set to expire after 10 years; their effects on revenue and economic growth are hotly debated, but several experts put the revenue loss at $1 trillion or higher. And as you may recall, last month, Trump and the current crop of congressional GOPers fell flat on their face as they attempted an ambitious health-care project.
Which way will it go this time? Let’s look at each of these three scenarios in turn.
Scenario 1: Reform at Last
The current tax system has few if any defenders. It is riddled with loopholes and economically indefensible favors to preferred political constituencies. The general formula for tax reform has always been to get rid of these unjustifiable breaks and use the savings to reduce rates for everyone, resulting in a fairer, simpler tax code that still raises the same amount of money.
It’s important not to cut revenue—at least without cutting spending at the same time—because this is what’s going to happen to our debt under current law according to a new Congressional Budget Office report:
You can stitch together a narrative in which Republicans want to do this and have at least a preliminary plan to get it done. As the liberal Center on Budget and Policy Priorities reminded us last week, high-ranking Republicans have made some promises that, if sincere, point in this direction. Most importantly, House Speaker Paul Ryan has said he wants tax reform to be revenue-neutral, and Treasury Secretary Steve Mnuchin once vowed there would be no “absolute tax cut” for the rich.
Ryan, as is his wont, also has a “blueprint” for tax reform that contains some provisions to broaden the base and kill off unnecessary tax breaks. Among much else, Ryan’s plan would eliminate itemized deductions—except the one for charitable donations and the one for mortgage interest. The former is defensible on the merits; the latter favors homeowners over renters and costs the government a boatload of money but is politically unassailable because so many Americans use it. (Full disclosure: I’d probably be more upset about the mortgage deduction if I didn’t have 20-odd years left on a mortgage in the expensive DC area.)
In this scenario, then, the Republicans pull together a sensible plan and pass it, improving the tax code for a generation or more. So long as the bill doesn’t increase the deficit outside of a 10-year budget window, they can use the reconciliation process to permanently change the law, meaning they won’t need 60 votes to break a filibuster in the Senate, where they have just 52 votes. Alternatively, some Democrats could get on board with the effort too, especially if Mnuchin’s promise not to cut taxes for the rich is kept.
Scenario 2: At Least We Have Tax Cuts
That will be difficult. Republicans will face a series of obstacles, starting at the very beginning of the effort: in order to use the reconciliation process, they will need to pass a budget resolution in May or June, and that resolution will contain controversial numbers on both the tax and spending sides of the ledger. If they can’t get a resolution passed, reconciliation will be off the table, and Congress will need to pass a “continuing resolution” to maintain current policies and keep the government from shutting down.
(As Stan Collender explains at Forbes, the budget-resolution part of the process wasn’t so painful during the botched Obamacare-repeal effort, which also relied on reconciliation, because in that case the resolution mainly just got the ball rolling. This time it will be the “real deal,” setting parameters for the actual 2018 budget.)
The issues only compound. Neither Paul Ryan’s plan nor President Trump’s campaign proposal was revenue-neutral, even according to the right-leaning Tax Foundation, and both were hotly criticized on the left for helping the rich much more than the poor. And to make matters worse, the Ryan plan relies on a “border adjustment tax,” which retailers vociferously oppose on the grounds that it would hammer imports, to raise about $1 trillion over 10 years—a difficult sum to make up if that provision proves unable to pass. (I explained the details of this policy and explored its various ramification here.) And among the itemized deductions the plan kills are, as Derek Thompson summarized in The Atlantic, “benefits for injured veterans, people living in low-income housing, foster homes, and families of public-safety officers killed in the line of duty.”
In addition, last month’s health-care failure could make it harder to pass tax reform, though it’s worth noting Vice President Mike Pence’s comment over the weekend that the GOP may take another crack at health care before tax time comes along. For all its flaws, the American Health Care Act would have eliminated Obamacare’s taxes and yet still reduced the deficit (by cutting Medicaid spending and insurance subsidies), accomplishing some GOP goals and getting them out of the way—without that head start, it’s even harder to achieve budget neutrality. It also doesn’t help that Trump all but declared war on the House Freedom Caucus, whose votes will again be needed, after the bill went down in flames.
Among inside-the-Beltway budget wonks, the consensus is that all this will probably prove too much, and Republicans will take the easy way out. Instead of comprehensively overhauling the system like Reagan did, they will use the reconciliation process to cut taxes the way Bush did—the only limit being that, since the cuts won’t be revenue-neutral, they’ll have to sunset after 10 years. The hope would be that a later Congress could make them permanent, which did happen with most but not all of the Bush cuts. Rep. Mark Meadows, who chairs the House Freedom Caucus, has already said he does not object to a tax bill that’s not revenue-neutral.
In addition to making the chart above look even more alarming, this move would create tensions with Trump’s pledge to look out for the working class in particular. Tax cuts almost inherently benefit the rich more than the poor, at least in absolute terms, and the tax plan Trump released during the campaign would have helped the rich more even as a percentage of their incomes. As I wrote back in November, “It will be a combination of sad and ironic if a signature achievement of a populist movement is to cut taxes for the rich.”
Scenario 3: Faceplant
Could it get even worse than that? It’s possible—some of the same obstacles to a tax overhaul could also hang up a simpler tax cut. If the Republicans fail to pass a budget resolution, or if the warring factions can’t come together afterward to agree on a plan, or if enough of the GOP decides it really does want revenue neutrality, little or nothing might happen.
There’s even the “wild card scenario” touted by Jared Bernstein, who served as chief economist to Joe Biden while the latter was vice president: Trump “gives up on Ryan and teams up with the D’s,” securing some tax cuts for high earners (as some Republican votes are still needed) but also pushing through a massive infrastructure plan.
Some say a Trump-Democrats alliance couldn’t happen. But none other than Paul Ryan is at least a little worried: “if this Republican Congress allows the perfect to be the enemy of the good, I worry we’ll push the president into working with Democrats,” he said recently on CBS This Morning, speaking in the context of health care. “He’s been suggesting as much.”
Robert VerBruggen is managing editor of The American Conservative.